Analysts, economists, and strategists: What's the difference?

There’s an old saying in the market - never ask a currency trader what he thinks of the market. The rationale behind this is that the trader can change his opinion, and his trading position, a few seconds or minutes later, and you’ll never know. But that’s what professional traders do - they hold opinions and positions based on their current assessment of the market, which is constantly being reassessed and reoriented.

As you follow the forex market, you’re going to be reading many different types of opinion and analysis from all sorts of market professionals. To make better sense of it all, it helps to understand where they’re coming from and what their strengths and weaknesses are. They all have something to offer, but you need to know what it is to factor it into your own market view. It may help to think of this as a big information funnel. Starting from top down:

Economists: Economists are great at interpreting day-to-day economic data and putting it into perspective to give you a picture of what’s really happening in the economy and how it’s likely to impact monetary policy. Economists’ views are best factored into your longer-term model of what’s happening to an underlying economy rather than applied to short-term market movements, along the lines of “This is what the data means, and this is how the market should react, in theory.” But markets have their own views of economic theory, and economists aren’t traders.

Analysts: Analysts come in two types: fundamental and technical.

• Fundamental analysts assess the broader market, incorporating economic, political, and market psychology into their viewpoints. They’re best at deciphering and explaining what’s happening in the current market environment - what’s driving the market now, which is great for keeping up with new information and staying on top of market developments.

• Technical analysts apply different technical disciplines such as the Elliott wave principle, candlestick analysis, or momentum studies to explain and make predictions about likely market developments. If you‘re following a technical analyst, make sure you know what approach she’s using and what that approach’s limitations are.

Strategists: Strategists are the closest to the market action and tend to have their sights focused on what lies ahead, anticipating market developments and suggesting actionable trading strategies based on them. Strategists are a great source of trading ideas. They also serve as early warning indicators of likely bumps in the road (for example, suggesting when the market has misinterpreted a piece of news or exaggerated an event’s significance).

Who decides how to put it all together and determine what it means for the market? Traders like you and me. Our job and your job is to factor in all the news, data, interpretations, and chart levels, and make trading decisions based on that information. Listen to what the market professionals have to  say, but make your own decisions based on how you see the market.

Rumors: Where there's smoke, there's fire

As if there weren't enough legitimate news and information to contend with in the 24 hour-a-day forex market, rumors have the nasty habit of popping up at unpredictable times. All financial markets love rumors. Here are some of the forex market’s favorites:

• Whisper numbers: These are rumors of economic data anywhere from a few minutes to a few hours before the scheduled release time. They tend to roil short-term positions opened in anticipation of a report, and they also influence the markets subsequent reaction to the report. For example, a whisper number suggesting a much-worse-than-expected U.S. data report, which was originally forecast to be weak anyway, may see the USD come under more intense pressure prior to the release time. When the real number comes out, and it’s weak but in line with forecasts and not as weak as the whisper number, the USD may actually rebound because the worst fears were not realized. Just chalk up whisper numbers as another reason to consider avoiding the market going into a data release.

• Large market orders: These are rumors that frequently do hold water, but like everything else, not always. They’re typically associated with central banks or large institutional players buying or selling, and they usually mention a price level.

• Terrorism rumors: Everything from suspicious packages to building evacuations sends a shudder through the market. But forex markets have become increasingly numb to terrorism rumors, and they tend to have relatively small and short-lived impacts on the currencies involved (like GBP dipping on a London subway evacuation). The USD tends to dip slightly regardless of the location of the rumored terror scare.

The trouble with rumors is that you have no easy way to determine whether they’re true, and even if you can, you have no way of being certain of the price reaction, which is ultimately the key to dealing with rumors. Rumors have the uncanny habit of coming out after relatively extensive directional moves or attempts to break through important technical levels, attempts that subsequently fail and see prices reverse direction.

The key is to be aware that an intraday move or test of a technical level is under way and to have a relatively tight exit strategy if the market turns tail. If there is a rumor behind a sudden reversal, you’ll usually find out only after the fact anyway, but a tight exit plan will save you from getting left behind in the reversal.